Puerto Rico oversight board wants lawsuits to remain frozen

NEW YORK (Reuters) - Puerto Rico’s financial oversight board on Friday said litigation brought by creditors against the U.S. territory should remain on pause while the island works to resolve $70 billion of debt its government has said it cannot pay.

A woman carries bags while walking in a commercial area with stores either closed or offered for sale in San Juan, Puerto Rico, July 31, 2015. REUTERS/Alvin Baez

In a brief filed in federal court in San Juan, Puerto Rico, the seven-member board said the Puerto Rican rescue law known as PROMESA requires the lawsuits to stay frozen. This would allow the board to fulfill its mandate of overseeing the island’s fiscal turnaround plan and facilitating debt restructuring talks with creditors, it said.

With residents emigrating to the U.S. mainland in droves and nearly half of those left on the island living in poverty, Governor Alejandro Garcia Padilla has demanded sharp cuts in payments to bondholders, calling it necessary to afford government services.

PROMESA, signed by President Barack Obama on June 30 after earning bipartisan support in Congress, called for creditor lawsuits against Puerto Rico to be put on hold, or “stayed,” while the federally appointed oversight board gets up to speed on the fiscal situation.

But creditors have filed at least a dozen lawsuits both before and since the law’s passage, and in several cases have claimed the stay does not apply to them.

The lawsuits generally allege Puerto Rico violated the U.S. Constitution by imposing a debt moratorium this year, allowing it to forgo certain payments and redirect revenues that had been earmarked for debt to cover other expenses instead.

The creditors claim to be exempt from the stay because they are not seeking an actual payment of debt, just a declaration that the moratorium was unlawful.

Judge Francisco Besosa’s decision on the stay, expected in days or weeks, could be crucial. Lifting the stay could allow the merits of Puerto Rico’s financial decisions to be hashed out in messy, expensive court proceedings -- exactly the scenario PROMESA was designed to avoid.

The oversight board, appointed in August, on Friday asked Besosa for permission to intervene in the cases. In an attachment to that request, the board laid out its opposition to lifting the stay, saying “ongoing litigation is a major distraction that interferes with the (board‘s) congressional mandate.”

Forcing Puerto Rico to respond to several lawsuits “is a significant expense ... and a burdensome distraction” to officials “whose time would be better spent working with the oversight board.”